How to understand the markets

The trading market can be the most lucrative industry if dealt with appropriately. A lot of money is circulating in the market every minute. Thousands of traders are gaining some profit, while at the same time many others are quitting due to massive losses.

The market is so diverse and dynamic therefore your trading method must adapt to all these changes. With that said, I want you to understand that however good you may think you are, you can’t wrestle with the market. Big financial institutions and banks know this better. Why do you think they hire the best to analyse the market for them? They do not want to be caught on the wrong side. The managers will make the next decision based on what the market analyst advises them. For your case, you have to do the same. Your system must be developed with the market situations at the back of your mind.

The recent Brexit vote is one of the occurrences that changed many things in the trading market. The GBP began immensely losing against other major currencies. If you recall, just before the Brexit, the GBP/USD was bullish. So if your trading system was based on a bullish trend and failed to change it to suit the then market conditions, what would happen? You would continue losing money just because you did not align yourself with the market.

In another example, in January of 2015, the Swiss national bank ended a policy that had maintained the Swiss Franc at 1.2 against the Euro. Before then, many viewed the Swiss franc as a haven. Therefore, if your trading system was based on the Swiss Franc as a safe haven, after 2015, you would begin losing almost every trade. You must keep your ears open and the head in the game. Try to understand the changes happening in the market, how they will affect your trading and then how to align yourself with the changes.

Any successful trader out there is always on the look, trying to understand the market better and align him or herself with it. Most trading strategies merely guide you on when to enter and exit. On the contrary, a suitable method should be one that quickly adapts to variable market conditions. A fact of the matter is, the markets will range, consolidate or get some breakouts, and it is your job to turn these occurrences in your favor. Here are a few tips to help you survive the turbulent

Embrace volatility

The trading market is filled with uncertainty and instability.  The volatility is brought about by the supremacy battles between sellers and buyers. These movements are the ones that create trading opportunities. You as a trader have no role in deciding who wins the battle; your part is merely to identify the winner and play by the winner. If the bulls have it, go long on your trades.

Focus on the monthly and weekly charts

The shorter the time frame, the higher the market volatility. If you are trading the 15 min of 30 min timeframes on your trading platform, you are listening to every noise in the market. You need to quit that, work with long-term frames. The trends are more defined and rarely come by surprise. Look for the long-term support and resistance levels. Be patient and do not get distracted by the small sudden movements.

Technical analysis

Use technical indicators to monitor trends on your trading platform. Indicators such as the MACD and Bollinger bands are essential in analysing changing trends. You can include them in your trading system to avoid chances of being caught on the wrong side when a trend changes. The can help you keep track of price action, momentum and volatility.

Avoid being in the market during an essential economic news

This may not adversely affect monthly and weekly traders as it could do to the short-term traders. If you insist on using hourly periods, then do not trade when you are expecting very high impact news.  Make the forex calendar your friend. Go through it on a daily basis; identify major economic events likely to affect you.

Come up with a strategy that has the edge over the market

Without an advantage, you are like any other gambler in a casino. If you do not have the edge over the market, then the market has the edge over your method.  You will be winning occasionally, but in the long-term, you end up being a loser. You do not have to pay thousands of dollars to achieve this. You need to look for opportunities while fine-tuning your system relentlessly.  Being a successful trader is not by lack but by putting your last effort for things to work out. You must have more time with your trading platform, to familiarize yourself with the different trading aspects. Any successful trader will dedicate more time to analyze charts, trends and patterns.

Understanding the effects interest rates have on exchange rates

Understanding how interest rates are moving is an important aspect of any trader. If a country is performing well economically, growth rates and a positive inflation they are likely to raise interests to curb inflation. On the other hand, economies under recession and negative or stagnating economic growth are likely to lower interest.

Conclusion

Sometimes the markets may be very unpredictable. The set up you have been working with are not being followed by the market anymore. During a time like these, change your strategy to a survival strategy. Preserve your capital at all costs, reduce your trades by like 60% and wait for the market to stabilize. Focus all your efforts on the most profitable and high probability trades only. Only take trades where you will achieve high risk to reward ratio. During times like these, the winning rate may go down; you want to take trades where one profitable trade covers up for unprofitable trades.

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